Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share andpays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of 0.6. There are 3 million common sharesoutstanding. The market risk premium is 10%, the risk-free rate is 6%, and the firm's tax rate is 21%.BOOK-VALUE BALANCE SHEET(Figures in $ millions)AssetsLiabilities and Net WorthCash and short-term securities $ 1.05.0Bonds, coupon = 78, paid annually(maturity = 10 years, current yield to maturity = 8%)Preferred stock (par value $10 per share)$10.0Accounts receivable3.0InventoriesCommon stock (par value $0.10)Additional paid-in stockholders' equityRetained earnings9.00.3Plant and equipment20.011.710.0$35.0$35.0TotalTotala. What is the market debt-to-value ratio of the firm?b. What is University's WACC?(For all the requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)а.Market debt-to-value ratiob.WACC

Market value is calculated by present value of cash flows from the debt issued at given yield to…

Answered: a. What is the market debt-to-value…

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter10: The Cost Of Capital

Section: Chapter Questions

Problem 21SP: CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in...

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The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of $1 million a year. The company’s stock currently trades at $60 per share. Compute the stock’s earnings per share (EPS). What is the stock’s P/E ratio? Determine what the stock’s dividend yield would be if it paid $1.75 per share to common stockholders.
CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?

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a. What is the market debt-to-value ratio of the firm? b. What is University's WACC? (For all the requirements, do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Market debt-to-value ratio b. WACC %